Lee C. Buchheit

How to Restructure Greek Debt

Plan A for addressing the Greek debt crisis has taken the form of a €110 billion financial support package for Greece announced by the European Union and the International Monetary Fund on May 2, 2010. A significant part of that €110 billion, if and when it is disbursed, will be used to repay maturing Greek debt obligations, in full and on time. The success of Plan A is not inevitable; among other things, it will require the Greeks to accept - and to stick to - a harsh fiscal adjustment program for several years.If Plan A does not prosper, what are the alternatives? And how quickly could a Plan B be mobilized and executed?This paper outlines the elements of one possible Plan B, a restructuring of Greece’s roughly €300 billion of government debt. Prior sovereign debt restructurings provide considerable guidance for how such a restructuring might be shaped. But several key features of the Greek debt stock could make this operation significantly different from any previous sovereign debt workouts.To be sure, a restructuring of Greek debt will not relieve the country from the painful prospect of significant fiscal adjustment, nor will it displace the need for financial support from the official sector. But it may change how some of those funds are spent (for example, backstopping the domestic banking system as opposed to paying off maturing debt in full).This paper does not speculate about whether a restructuring of Greek debt will in fact become necessary or politically feasible. It focuses only on the how, not the whether or the when, of such a debt restructuring.

The Pari Passu Fallacy -- Requiescat in Pace (La Falacia pari-passu -- Descanse en paz)

English Abstract: The pari passu fallacy, first uncloaked in 2000, holds that when a sovereign borrower promises to maintain the equal ranking of a debt with the borrowers other senior indebtedness, it thereby implicitly promises to pay all of those debts on a ratable basis. In its 18-year life span, the fallacy caused considerable mischief in the sovereign debt market. Recent decisions of the US federal courts in New York have clarified the circumstances in which a sovereign borrower will be held to breach, and just as importantly when it will be held not to breach, a contractual pari passu undertaking. Spanish Abstract: La falacia pari passu fue esgrimida por vez primera en el ano 2000. Segun esta falacia, cuando un deudor soberano promete mantener una deuda en igualdad de condiciones que sus otras deudas preferentes, implicitamente promete que pagara todas sus deudas de forma prorrateada. Durante su larga vigencia de 18 anos, esta falacia ha causado problemas considerables en los mercados de deuda soberana. Sin embargo, decisiones recientes de los tribunales federales norteamericanos con jurisdiccion en Nueva York han aclarado las circunstancias segun las cuales se considerara que un deudor soberano ha incumplido e, igualmente importante, cuando se considera que no ha incumplido la obligacion contractual pari passu.

Sovereign Debt Restructuring in Europe

The Eurozone sovereign debt crisis began in the spring of 2010. Seven years on seems like an appropriate point at which to critique how the crisis has been handled and to assess whether policy changes will be required should it flare up again. In particular, there are a number of lessons to be learned from the Greek debt restructuring of 2012.